Berkshire Hathaway owns a lot of stocks that span numerous industries. But there's one dominant retailer that isn't on the list.
It might come as a surprise that legendary investor Warren Buffett doesn't own Costco Wholesale (COST +0.80%) shares. This is even more shocking when you realize his right-hand man, Charlie Munger, is a large shareholder.
I think there's a pretty obvious reason for why that is. But before getting to that, let's first look at what would make the Oracle of Omaha love this business in the first place.
Taking care of customers
Costco is known for putting its customers' needs at the top of the priority list. This presents itself in the form of low prices on a wide range of merchandise, from appliances and groceries to apparel and home furnishings. In fact, the average markup on products at a typical Costco warehouse is just 11%, much lower than other major retailers.
Furthermore, Costco does a great job at providing a wonderful shopping experience. By paying employees well and giving them lots of benefits, they are more inclined to perform better. And this results in happy customers.
Costco also operates a treasure-hunt shopping experience, with random deals throughout stores. This encourages shoppers to stay longer and roam around the entire warehouse, which is exactly the type of traffic that retailers want.
This strategy is working. Costco reported that same-store sales rose 4.5% in the month of September. That's a notable improvement from just a 1.1% increase in the fiscal 2023 fourth quarter (ended Sept. 3). In an uncertain macroeconomic environment, this data is very encouraging. I'm sure Buffett approves of the durability that Costco has.
Management's thinking is probably based on the assumption that if customers are taken care of, then shareholders will also be rewarded. And this has certainly been the case, as the stock has climbed an impressive 396% in the past decade, crushing the S&P 500.
Driving customer loyalty is Costco's successful membership model. There are currently 71 million member households across the world that helped bring in $4.6 billion of fee revenue last quarter. This metric was up 8% year over year. During Q4, the renewal rate in the U.S. and Canada was a superb 92.7%, demonstrating how much the membership resonates with shoppers.
As it relates to Costco's memberships, there's also proven pricing power that's a part of the model. The last annual fee hike was implemented in June 2017. CFO Richard Galanti has hinted that another price increase is on the horizon.
Look through Berkshire's portfolio, and you'll quickly realize that Apple is the top holding by far. The iPhone maker benefits from tremendous customer loyalty as well as pricing power, traits that I bet spurred Buffett to buy Apple shares in the first place.
NASDAQ: COST
Key Data Points
An expensive stock
For all the fantastic qualities that Costco possesses, investors might be wondering why Berkshire and Buffett don't own the stock today. I think the reason is pretty clear. For the record, it was a holding before, but Berkshire exited the position in late 2020.
As of this writing, Costco shares trade at a trailing price-to-earnings (P/E) ratio of 40.4. That's roughly 22% more expensive than the stock's historical 10-year average P/E multiple of 33. This means there's definitely a ton of optimism surrounding the business -- or investors might just be piling into Costco stock as a safe haven amid macro uncertainty.
Shares are also much more expensive than rivals Walmart (P/E of 31) and BJ's Wholesale Club (P/E of 18.4). But a valid argument can be made that Costco is a superior business compared to these other retailers.
However, Buffett considers the valuation before buying a stock. And while Costco might check all of the boxes when it comes to quality, if the price isn't right, it's best to practice patience and wait for a better entry point.
